Kentucky Bankruptcy Law

Counsel with Care

Saving Your House: Mortgage Business Loans

I speak with many small business owners who have weathered tough financial struggles in their businesses and need some sort of relief. Inevitably, at least one business loan has insisted on a second mortgage against their house. This becomes problematic if the business person is forced into bankruptcy as a last resort and also wants to keep his or her residence. There are two possible sources of relief, only one of which do I address in this post and I am not going to touch on a Chapter 11 at all because that is nearly always to expensive for a small business.

11 USC Section 1322 provides for what one can and cannot do in a Chapter 13 plan. Section 1322(b)(2) basically says that you cannot modify a debt secured against one’s personal residence. However, that debt can ONLY be secured against one’s home to have this protection. In most cases, a business loans secured against the debtor’s personal residence is also secured against some other property, such as a building owned by the business or the assets and inventory of the business. These loans can be modified.

So, a business owner who wants to save their house can go into a Chapter 13 and “cram down” the principal of that business loan to the value of available equity in that home. The rest of the loan becomes unsecured and subject to discharge at the completion of the Chapter 13. If there is no equity, then the loan becomes wholly unsecured.

My usual caveat here: each particular debtors circumstance can impact whether or not the approach I am referencing would work. One should consult with a knowledgeable bankrutpcy attorney to determine whether all the details line up becuase navigating the bankruptcy code can be rather complex.

June 29, 2017 Posted by | Bankruptcy, Business & small business, Chapter 13, Foreclosure, Plan, Planning, Pre-filing planning, Security interests, Uncategorized | , , , , , , , , , | Leave a comment

Chapter 13 lasts awhile, but stay in touch

Chapter 13s last either three (3) years or five (5) years depending on a households income at the inception. That is quite a long time and it can be easy to let it fade into the background of one’s mind after settling into the rhythm of monthly payments to a Chapter 13 trustee. A debtor in a Chapter 13 likely had considerable contact with their attorney at the very beginning of the case, but this becomes less and less frequent after the plan is confirmed and all the claims have come in. After a couple of years, some old habits can creep back in, and the debtor may never think to contact their lawyer when faced with certain financial decisions.

Many of my Chapter 13 clients come to me to help save their home from foreclosure. A Chapter 13 is a grand tool for just such a thing. Most of these clients got to the point of facing a foreclosure action in State court because they made choices between paying a house payment and getting needed car repairs or paying for a necessary medical procedure. That first time of missing the payment, they likely started getting some calls, but nothing earth shattering happened. Next thing they knew, several missed payments have racked up, they are served with a civil summons, and the only way to catch them up is through a five-year Chapter 13.

Then Christmas rolls around that second year into the Chapter 13 and the belt-tightening budget worked out with the trustee really only left room for macrame’ gifts for the children or perhaps a Chia pet or two. It is heartbreaking for a parent when their children’s friends are getting the newest iPhone or PlayStation 4. Perhaps the car broke down again or the refrigerator they had been nursing along for an extra 10 year lifespan finally goes out. Well, that old pattern kicks in and it seems pretty harmless to miss a house payment. After all, nothing bad happened before until a good six months down the line. Well, bankruptcy is a different world.

Most home loan creditors will file a motion for relief from the automatic stay (the law that precludes them from going ahead with the foreclosure once bankruptcy is filed) with just one or two missed payments post-petition. Being in Chapter 13 basically puts them on high alert and they are much quicker to pull the trigger.

This is not the end of the world – yet. Their attorney can object to the motion and almost always work out an Agreed Order to get caught back up again in about six (6) months. However, there is a hefty price to be paid. The creditor will add in their own attorney fees and they will also likely insist on a drop-dead provision where if those payments do not roll in on time, the stay will be lifted without filing another motion and they can then proceed with the foreclosure.

The better course of action is to call one’s bankruptcy attorney to do some problem solving when an unforeseen expense comes about. In the Eastern District of Kentucky, the Chapter 13 Trustee typically does not oppose a motion to suspend plan payments for a month or three if there is a good reason. That is often enough to get past some unexpected expense and get back on track making up the payments. The upside to this is that the debtor will not get hit with hundreds more in attorney fees or end up on a probation sort of situation. So, even if it has been a long time since you talked to your bankruptcy attorney, if things go awry, call them first and get help.

January 15, 2015 Posted by | Additional Debt, Automatic Stay, Bankruptcy, Chapter 13, Disposable Income / Budget, Foreclosure, Plan, Plan payments, Planning, Pre-filing planning, Secured loan arrears | , , , , , , , , , , , , , | Leave a comment

Dormant Debt Device

You can avoid a judicial lien on property that impairs an exemption pursuant to 11 USC Sect. 522(f).  The most common way this plays out is that a creditor has filed suit, obtained a judgment, and then filed a lien on from that judgment against your real property. This lien can sit dormant against your home for fifteen years, but it must be satisfied if the property is ever sold. The creditor may pursue foreclosure but they rarely do that unless they believe there is enough equity in the property.

In order to strip off the judgment lien, your bankruptcy attorney must file a motion within the bankruptcy as a contested matter. In other words, if your attorney does nothing else, then the lien will survive the discharge. Previously, this was done within the plan of a Chapter 13, but the local rules have changed so that it must be done by motion in both Chapter 7 and Chapter 13 bankruptcies.

If your attorney was unaware or the judgment lien or otherwise failed to file that motion to strip the lien, not all is lost. A decision in the Eastern District of Kentucky Bankruptcy Court, In re Cross, Case No. 93-50547, the Debtors failed to strip the lien off their real property while the bankruptcy remained open. Twenty months after the case closed, the Cross’ reopened the bankruptcy and moved to have the lien stripped. Despite the passage of time and the creditor arguing that the Debtors waived the right to strip the lien based on so much time passing, but the court rejected that argument.

For a judgment to qualify to be voided (stripped off) it must impair the exemption amount that the debtor claims in the property. Many debtors do not even know they have a judgment lien in their property so, it is important to go to the country clerk and obtain a copy of any active liens for your lawyer to evaluate.

September 24, 2014 Posted by | Assets, Bankruptcy, Chapter 13, Chapter 7, Exemptions, Planning, Pre-filing planning | , , | Leave a comment

The danger of short term loans on your house

You home is an incredible source of collateral for loans when there is equity (value minus debt secured against it), but there is also danger in using your home this way. There are still lenders who will do rather large, short-term loans secured against a private residence. These loans can be tempting because they often will provide for relatively low-interest loans. However, they can be dangerous. especially when they are balloon loans. Such loans are seductive because they have low monthly payments with a final huge payment due at the end.

I have seen these often used by people trying to get a business venture off the ground. However, people sign up for them for many reasons. The business folks are essentially betting on having a solid and very profitable business going in three to five years. I admire their confidence, but most businesses that survive take three years just to start making a modest return. And so, many find their balloon payment looming without adequate resources to cover the debt. Sometimes banks will roll it into a new loan, but there is no guarantee of this. Therefore, it is wise to talk to a lawyer who knows about bankruptcy prior to that maturity date.

Banks like loans against your personal residence because the revisions to the bankruptcy code back in 2005 gave special treatment to loans secured solely against one’s residence. Basically, 11 USC Section 1322(b)(2) prevents such loans from being modified in a Chapter 13 bankruptcy. Therefore, the only thing one can do is cure the arrears through the bankruptcy, but the underlying agreement remains intact. There is a nice little exception, though, found in 11 USC Section 1322(c)(2) for loans that come due DURING the Chapter 13. So, if one times things right and files a Chapter 13 BEFORE the last payment on your short-term loan is due, a Debtor CAN modify that loan to some extent.

The most likely use for this exception is to move the maturity date of the loan out for the duration of the Chapter 13 plan and thus provide for the cure of arrears on that loan. The Debtor still has to show that the lender is adequately protected, but that hurdle is usually overcome easily with real estate that is either holding its value or increasing in value. This is NOT a complete remedy, but it can buy more time for a Debtor to either find alternative financing that has no balloon payment or make those profits they hoped for that would cover the debt.

September 9, 2014 Posted by | Additional Debt, Adequate protection, Bankruptcy, Chapter 13, Financing, Foreclosure, Home Loan Modification, Home loan modifications, Plan, Plan payments, Planning, Pre-filing planning, Secured loan arrears, Security interests | , , , , , , , , , , , , , , , | Leave a comment

Answering a lawsuit on your own

Having a sheriff or constable hand you a summons and complaint (a lawsuit) is an awful feeling. If you have been served with a lawsuit, then you really should consult a lawyer about the particulars of the complaint. This post should not be a substitute for obtaining individualized legal advise. However, I also know that not everyone has access to legal representation. If you are being sued for non-payment of a debt, then you likely have a hard time finding the funds to retain counsel. So, I am offering a few pointers in filing an answer to a complaint in order to protect your interests.

First, though, I want to suggest you reach out to a modest means or pro bono legal clinic if you cannot obtain private counsel. In the Bluegrass area and Eastern Kentucky you can contact: Legal Aid of the Bluegrass, The Fayette County Bar Association, and AppalReD.

Again, this is not a substitute for legal advice:

In Kentucky, a state court lawsuit must be answered within twenty (20) days of being served with the complaint. If the 20th day falls on a weekend or holiday, you have until the next weekday to file your answer, though I always err on the side of filing it a day or two early. If your goal is to delay the lawsuit as long as possible while you pull things together for bankruptcy, then you will wait until the last day of your time before filing your answer (again, I shave a day off just for an abundance of caution). Filing an answer consists of delivering your original, signed answer to the clerk and mailing a copy to each lawyer (or unrepresented party) listed on the complaint you received by first class mail. You do not need to send it certified mail.

The answer consists of three parts. The first part is the “style” of the case. It is all the stuff on the heading of the complaint, except you do not have to list the addresses of the parties – just their names – and you call it an “Answer” rather than “Complaint”. The case number is the most important part because you want the clerk to file your answer in the right case.

The second part is where you either admit or deny the allegations in the complaint. This is where a bit of lawyer speak comes in: if do not know something for certain, but suspect it may be true, you can still deny it by saying “I cannot confirm or deny such and such allegation of the complaint, therefore I deny the same.” You must do this because anything you admit in your answer is not longer a controversy. So, if the lawsuit is filed by the original creditor that you borrowed money from, then you can admit that you owe them a debt, but still deny the exact amount they are claiming is owed. However, if the lawsuit is brought by a collection agency or a party claiming that the debt was assigned to them, you may suspect that to be true, but you really do not know for sure that it was assigned to them correctly. So, you can deny owing that party a debt altogether as well as the amount they claim is owed. You must sign this part of the answer, but do NOT sign for anyone else. If you and your spouse are being sued for the same debt, you each must sign the answer or risk being found to be practicing law without a license.

The third part must also be signed (so you will sign your answer twice). This part simply is a statement saying that you put a copy of your answer into the mail, US Post, first class postage, and then list each party or their lawyer and the address you mailed it to. Again, sign after this statement and make sure you actually do send a copy to that party or lawyer.

Filing the answer can either be hand delivery to the clerk or by mailing your answer in to the clerk. Either way, you also want to submit a cop of your answer along with the original so that the clerk can stamp it and hand the copy back to you. This is your proof of filing the answer just in case the clerks misplace the answer (they do have lots of cases to manage by the way). If you mail your answer in, send a self-addressed, stamped envelope along with the original and copy so the clerk can mail it back to you.

Filing an answer in a lawsuit simply prevents the plaintiff from a quick and easy default judgment against you. It forces them to produce proof to the court. They may do this by way of a Summary Judgment or it may end up being a hearing (especially if it is small claims court). Either way, it typically gains you extra time to either file bankruptcy or prepare a defense.

August 8, 2014 Posted by | Alternate Debt Relief, attorney fees, Bankruptcy, Chapter 13, Chapter 7, Planning, Pre-filing planning | , , , , , , , , , , , | Leave a comment

When should I file bankruptcy?

First of all, I want to clearly state that bankruptcy is not something to aspire to achieve. Almost no one wants to file a Chapter 7 or a Chapter 13 and get a discharge of debts. Nearly everyone I talk to would rather have the means with which to pay their creditors. So, if you are reading this post, you have likely already tried everything you can think of to make things work and you are considering bankruptcy as a last resort. I can appreciate that. And I know that also means many of you have already gone past the point where wisdom would have you go. And that is why I hope to lay out some general principles as to when one should file bankruptcy. Everyone’s situation has its own unique twists and turns, so you should find a lawyer who will provide a free consultation to see if it is time for you to file.

If a creditor has filed a lawsuit against you to collect a debt because you have not had the means to pay it, then you likely should file.

If the only way you can pay all your bills next month is to take a loan out from your retirement account, you likely should file.

If your house has been sold at a foreclosure auction, you likely should file.

If your car has been repossessed and sold at auction for less than you owed on it, you likely should file.

If you are seriously considering utilizing a payday loan provider in order to stay afloat, you likely should file.

If you feel crushed by debt and you do not see an end in sight unless you win the lottery, you likely should file.

If your employer notified you that they just received a wage garnishment order, you likely should file.

The main thing is to not wait until you are right up against the wall. It takes time to properly assess a persons financial situation and make sure that a petition and schedules are accurately completed. This means that you have to pull together a lot of documents in a very short period of time. It is far better to seek counsel when the crisis is still off in the future a bit.

August 7, 2014 Posted by | Bankruptcy, Chapter 13, Chapter 7, Credit Counseling & Debtor Education, Planning, Pre-filing planning | , , , , , , , , | Leave a comment

Phone Adventures or “How does one get an “Account Transcript” from the IRS?”

This post is geared more towards attorneys practicing bankruptcy law, but it is useful to anyone trying to resolve income tax debt. I am following up on my last post about how to determine if income tax debt can be discharged in bankruptcy. First, as an attorney, you have to complete and have your client sign a Power of Attorney, Form 2848. Well, actually you have to back up a step further and obtain a CAF number from the IRS. You will need that CAF number in order to get anywhere with them.

Once the 2848 is completed, you send it in to the IRS so that they can either lose it or take weeks to process it. Oh, but do not worry, you can still proceed. You next want to get a Form 4506-T completed. You really should do this at the same time as the 2848 to save time. There are fax numbers of the back of the 4506 to send it to  and you only have to try that fax number a dozen or so times. More recent years can be obtained by calling the automated number for the IRS, but the transcripts can only be sent directly to the taxpayer’s address if you go that route.

Once the Account Transcripts come in, you need to look for those “520” codes I mentioned in the last post. If there are any on the transcripts, you will want to spend a leisurely afternoon on the phone listening to the Internal Revenue Services music interrupted by occasional transfers to different departments. Once you get to the right place, you will be grilled about who your are. They will look in the system and fail to find the 2848 that you had dutifully sent in per the instructions. Just go ahead and have a copy of the 2848 at hand because the person helping you will ask you to fax it directly to them.

Once that 2848 is in front of them, they will ask you to repeat information that is clearly spelled out on the form itself to “verify” things. It seems this only verifies that you faxed them the very same document they are looking at, but no matter. Now you are cooking with GAS – well, perhaps kerosene. It will just take a few seconds to get the closing code. If you want to forgo this whole experience, then look for a code “971” and see it there is one whose dates corresponds to the “520”. If so, you are safest to assume that the closing code is 77.

PS: By the by, attorneys, this is a time intensive and liability laden analysis, so be sure to charge separately from the bankruptcy for this procedure.

PPS: Be sure to get your client’s dates of birth – the IRS sometimes asks for this to verify that you are whom you say you are.

January 28, 2014 Posted by | Bankruptcy, Chapter 13, Chapter 7, Planning, Pre-filing planning, Tax Debts | , , , , , , , , , , , | 2 Comments

The Ramifications of Paying Off a Chapter 13 Early

I am often asked by Chapter 13 debtors if they can pay their Chapter 13 off early. This is a problematic question with no one clear answer. It is problematic because certain property of the debtor continues to come into the Chapter 13 estate while the bankruptcy is pending. This is different from a Chapter 7 where the property of the estate is established and remains static at the moment the bankruptcy is filed. The clearest example of this ongoing inclusion in a Chapter 13 are wages and other earned income of the debtor.

Since ongoing wages and earned income of the debtor comes into the estate of the Chapter 13 so long as the case is pending, then one cannot use those wages to pay your plan off early IF you were not below the median income on the means test OR you are paying 100% of unsecured debts in the Chapter 13. This makes sense because the idea with a Chapter 13 is that you repay creditors to the extent that you reasonably can. So, if you end up getting promotions or a better paying job during the bankruptcy, then you could reasonably pay a higher percentage of your unsecured debts.

Some Chapter 13 trustees require a new budget (Schedules I & J) to be submitted each year. If they see a substantial bump up in disposable income, they then require the plan to be modified to pay a higher percentage of the unsecured debts. In the Eastern District of Kentucky, the trustee does not automatically require this. However, if you begin to pay ahead on your Chapter 13 plan, they well may pay attention and decide you must be making more money. This can trigger a demand from the trustee for a new budget and probably a higher plan payment.

There are some things that clearly and unquestionably CAN be used to pay off a Chapter 13 plan early. If you use property of the estate that was exempt at the inception of the bankruptcy, such as a 401k account, then there should be no issue if you fell below the median on the means test. However, there are other things that need to be investigated and carefully considered by your attorney. Therefore, I must abstain from listing those things that are in the grey area here lest I miss some peculiarity of your situation.

January 27, 2014 Posted by | Bankruptcy, Chapter 13, Chapter 7, Discharge, Plan, Planning, Property (exempt | , , , , , , , , , , , , | Leave a comment

The Scoop on the $71.00 Bankruptcy

I saw a TV ad yesterday afternoon by a law firm that does a high volume of bankruptcy filings. I had just finished a five-hour evidentiary hearing and so I took off a little early to refuel. Those evidentiary hearings require tremendous and sustained concentration.  Anyway, this ad surprised me. The attorneys at the firm stated in the commercial that they knew how tight people’s budgets were so they would “get started with your bankruptcy for only $71.00.” I got out my calculator and started crunching numbers to see how they could stay in business.

You see, that law firm has a high overhead. They spend thousands and thousands every month in television commercials and billboards. They also utilize paralegals and support staff to prepare petitions and other necessary documents to file a bankruptcy. They have a nice, decent sized building in a strategic main thoroughfare. And, of course the attorneys want to make a decent living also. All that adds up to high overhead costs that have to be covered somewhere.

In my situation, I do all the work myself and so I have no support staff. My partner and I have a reasonable lease on a 200-year-old “mansion” (a.k.a. farmhouse) in the middle of a subdivision. Our advertising budget… well, this is it. You are looking at it. Sure, I also want to make a decent living, but still this all adds up to very low overhead and this gets passed on to you.

So, basic math dictates that the big law firm must make much more money than the small law firm. They are either charging more for each case than I do, they are cutting costs somewhere, or both. I cannot say anything more specifically about that law firm because I do not know more. I can say that, in general, businesses that do volume business build in costs reduction by standardizing everything. Think McDonald’s.

So, how can they advertise this $71.00 deal? Go back to McDonald’s and think dollar menu. The dollar menu offers a very low-cost option that is small and bare bones. But, that still does not explain it all. True, they are likely basing that $71.00 on their most basic services in the simplest of Chapter 7s. And, that still cannot possibly be done for $71.00. So, the key is in the phrase “get started for….” Lawyers know to listen for such phrases, but the general population over skips over them. This is how marketing is so effective.

Easy enough. I do free consults already and then I typically ask for $200.00 to be paid into escrow before I actually am “retained”. This means that I will then take creditor calls when necessary, you can tell creditors to leave you alone and contact me, and I will complete the means test. I suspect that for $71.00, they will only have their paralegal gather paper work and perhaps even do a rudimentary means test, but then they will work out a payment plan for the rest. Well, I will match that. I will even beat it. For $70.00 I would also be willing to gather your paper work and do a means test. Then, we can make a plan for the rest, but I will not be able to deal with creditors for you. Just mention this blog post for this special offer.

Do not be fooled, though – the $71.00 (or my $70.00 offer), will NOT get you a bankruptcy. It just gets things started. You will have to come up with several hundred dollars prior to filing for attorney fees whether you come to me or go to the firm with the advertising. Fees not paid prior to filing a Chapter 7 would be a debt owed in the bankruptcy and discharged just like every other debt. The difference to consider: my partner and I actually do all the work ourselves and ensure high quality of work.

December 11, 2013 Posted by | attorney fees, Bankruptcy, Chapter 13, Planning | , , , , , , , | 1 Comment

Consolidation loan conundrum

I had a consult scheduled with a potential client recently who did not make it in. No worries, I just reached out to her to see if she wanted to reschedule. She declined because she had initiated a consolidation loan process to pull together all her outstanding unsecured debts under one, lower interest rate. She was getting this consolidation loan by refinancing her house and using up any equity in the house to secure the loan. I still offered to meet with her – for free even though I likely would see no business result from the meeting. I did not want to talk her out of this plan; I simply wanted to make sure she had full knowledge of all the ramifications. This is because I know people who have done this successfully and avoided bankruptcy. I have known others who did this and it ended up putting their home at risk.

Essentially, a consolidation loan like the own my potential client was wrangling does not reduce debt principal. It usually does reduce interest costs over the lifetime but, to be sure of this, one must factor in the closing costs and fees associated with an equity loan secured by your house. What does happen is that unsecured debt gets converted into secured debt. Secured loans offer lower interest rates because the risk of total loss on the loan is mitigated by the value of the property securing the loan. In other words, if you do not pay they take your house.

A bankruptcy, whether Chapter 7 or Chapter 13, shreds off most or all unsecured debt. So, in a bankruptcy situation, unsecured debt is good debt to have because you will not have it long. Secured debt does not pass away so quietly. You can sever the personal obligation to repay the debt, but there are only very narrow avenues by which the secured obligation – the liability on the property – can be done away with. An equity line on a house can only be completely discharged in a Chapter 13 IF there is absolutely zero equity to which the loan actually adheres.

So, if my potential client does follow through with this secured consolidation loan, then she has closed off the possibility of shedding that debt unless she sheds the house as well. This may be a great strategy. She may have enough income that is reliable enough to make that extra house payment and still meet her living expenses. I just want her to know that doing so commits her to that one way out of debt and to make that decision with as full knowledge as she can get. And, if it works out, I am glad for her. If it does not work out, well – perhaps I can still help her save the home with a Chapter 13.

December 3, 2013 Posted by | Alternate Debt Relief, Bankruptcy, Chapter 13, Chapter 7, Consolidation loan, Discharge, Planning, Pre-filing planning, Security interests | , , , , , , , , , , , | Leave a comment